Portfolio Optimization with Recursive Utility under Small Transaction Costs
Event details
| Date | 24.11.2015 |
| Hour | 12:00 › 13:00 |
| Speaker | Yaroslav MELNYK (Postdoc, SFI@EPFL) |
| Location | |
| Category | Conferences - Seminars |
We investigate the portfolio problem of an investor with Epstein-Zin recursive utility under proportional transaction costs. We characterize the solution via variational inequalities and prove existence of classical solutions for small cost parameters. We also provide a suitable verification theorem. This allows us to derive rigorous asymptotic expansions for optimal no-trade regions and consumption strategies and to investigate the effects of the investor's relative risk aversion and the elasticity of intertemporal substituion (EIS) $\psi$ on the optimal strategies. Our main findings are: (a) At the leading order, the no-trade region is the same as with additive expected utility; in particular, it is determined solely by the relative risk aversion. The no-trade region depends on the investor's EIS only at the next-to-leading order, and only indirectly thought the frictionless optimal consumption rate. (b) The investor's optimal consumption depends on his EIS also at the leading order. The consumption-wealth ratio is higher than in the frictionless case if and only if $\psi>1$.
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